Global Investment Committee Outlook: Continue risk-positive

The global economic recovery should surge, even above consensus

A large majority of our members agreed on a positive scenario in which the global economy mildly outperforms market consensus, while equities continue to rally. Even though we forecasted in December that GDP growth would rise well above consensus, the aggressive fiscal and monetary stances globally have pushed CY21 consensus above those forecasts, especially for the US. Our new scenario continues to predict that vaccines will heighten optimism among a much wider number of investors and that geopolitical risks will not hamper economic activity. Meanwhile, we continue to expect the US Senate to avoid stalemate via various compromises (although the rhetoric will remain virulent), leading to a mollified version of the Democratic agenda, and thus, that the economic recovery will have a disinflationary tenor globally.

For the US, GDP should increase 8.7% Half on Half Seasonally Adjusted Annualised Rate (HoH SAAR, as used in all references below) in the 2Q–3Q and 4.8% in the 4Q21–1Q22, vs the 8.2% and 4.5% consensus estimates for each. Personal consumption should surge, especially in the re-opening services sectors (while auto sales will be dented by supply shortages), and private capex should continue to improve in most sectors, especially tech spending. Construction spending outside of the infrastructure sector will likely be constrained, but government spending should contribute to grow due to the Democratic agenda, while net foreign trade will likely subtract from GDP growth.

After a virus-constrained 1Q, Eurozone GDP growth should be 7.1% in the 2Q–3Q and 7.5% in the 4Q21–1Q22, vs the 6.7% and 6.9% consensus estimates for each. Meanwhile, Japan’s 1Q was also hurt by virus issues and supply shortages but should grow 4.4% in the 2Q–3Q and 4.2% in the 4Q21–1Q22, vs the 4.0% and 3.3% consensus estimates for each. Deep consumer fears shifting toward optimism should be particularly pronounced in these two regions, with business confidence also boosting capex to a surprising degree. Japan should benefit greatly from continued global tech demand, but auto production will be hampered due to industrial accidents at auto-related semiconductor plants, which worsened since we made our forecasts. Europe, China and the US will also have automotive production disruptions, with smartphones and some other electronic products also somewhat disrupted, which will be somewhat of an economic headwind.

For CY21, growth for the US, Eurozone and Japan should hit 6.7%, 4.8% and 4.3%, respectively, vs market consensus of 6.2%, 4.5% and 4.2%. Meanwhile, China’s official CY21 GDP growth should be 10.1% vs consensus of 9.5%. In sum, these positive GDP results should please risk markets, but present a challenge to fixed income markets.

Non-economic factors less of a concern

There continue to be valid reasons for concern about many geopolitical issues, especially regarding North Korea, China and the Middle East. Fortunately, we were correct in December that BREXIT would not have a traumatic outcome, but implementation may hit a few snags in 2021. Relations between the West and China remain very tense, but neither side seems willing to cross any red lines, although the blacklisting of a major European retailing firm certainly ratchets up the potential for major economic disruptions. Increased fears about Taiwan certainly should not be ignored either. The G-7 coalition addressing concerns in China may trigger continued retaliation and the recent EU-China investment pact could well be in jeopardy. Meanwhile, the Middle East is even more a powder keg than usual, with Iran (and its regional proxies, including the Houthis’ continual bombing of Saudi Arabia) becoming increasingly desperate, while Turkey is involved in several intense conflicts. However, we continue to expect wiser heads to prevail in these situations and, thus, not expand into crises. The foreign perception is likely correct that the Biden administration is more concerned with domestic policy and economic prosperity than it is on international affairs, although they may increase the rhetoric and minor sanctions on top of those by the Trump administration.